ECON 200

Class Problem: 10 Pointers

Full Name: ________________________

Absolute Advantage: Table below shows the production possibilities schedule for two
countries: the US and Mexico.

US Mexico
Microchip Car Microchip Car
100 0 15 0
80 10 12 12
60 20 9 24
40 30 6 36
20 40 3 48
0 50 0 60

1. Draw the production possibilities curve for the USA and Mexico. Use Microchip in y-
axis, and car in x-axis.

2. Assuming there is no trade between two countries. Let’s assume that the US chooses to
produce 40 microchips and 30 cars, whereas Mexico produces 9 microchips and 24 cars.
Highlight these points in the graph.

3. Show the total production of microchip and car for both countries. (Total microchip =
microchip produced by US + microchip produced by Mexico)

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 No Trade
Microchip Car
US
Mexico
Total

4. Fill in the blanks:

Now, each country specializes and produces more of the product in which they have an
absolute advantage. If the US produces microchips only, it can produce ………
microchips and no car. If Mexico only produces cars, it can produce ….. cars and no
microchips. Given its resources, Mexico can produce 60 cars whereas the US can only
produce …... Similarly, the US can produce ……..microchips and Mexico can produce
……. microchips if they use all the resources.

5. Define Absolute advantage. In which product will each country specialize?

6. If both countries specialize and produce the product in which they have an absolute
advantage. Show the total production of microchips and cars.
Specialization
Microchip Car
US
Mexico
Total

7. Both countries agree to trade. Let’s assume they agree to trade 20 microchips for 32 cars.
Exchange/Trade
Microchip Car
US
Mexico
Total

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Comparative Advantage: The table below shows the production possibilities schedule for two
countries: the US and Mexico.

US Mexico
Microchip Car Microchip Car
100 0 15 0
80 5 12 2
60 10 9 4
40 15 6 6
20 20 3 8
0 25 0 10

1. Which country has the absolute advantage in microchip production? Which country has
an absolute advantage in producing cars?

2. What product should each country produce?

3. For the US, what is the opportunity cost of producing 1 car? For Mexico, what does the
opportunity cost 1 car?

4. Who can produce a car for a smaller cost?

Important:
The US has an absolute advantage (more productive) in the production of car, but Mexico has
a comparative advantage in the production of cars. (Means Mexico can produce the car at a
lower opportunity cost.

5. So, who has a comparative advantage in the production of microchips? Who can produce
microchips at a smaller cost? Who can produce microchips and give up fewer car?

6. Assume the following quantities are produced before specialization.

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 No Trade
Microchip Car
US 60 10
Mexico 12 2
Total 72 12

After knowing the comparative advantages, the US produces more microchips and
Mexico produces more cars. Suppose they pick the following combinations.
Specialization
Microchip Car
US 80 5
Mexico 3 8
Total 83 13

Suppose the US agrees to sell 12 microchips for 6 cars. Complete the total product after
the trade.
Exchange/Trade
Microchip Car
US
Mexico
Total

7. Should they trade?